Let me bring you up to speed: The NHL owns the Phoenix Coyotes hockey team, having taken them over in bankruptcy. It needs to sell the team and is demanding $200 million for the team, having promised the league owners it would not accept anything less (so they will not take a loss in the investment). The team is worth, however, something like $100 million, at least if it stays in Arizona.

The team plays in a stadium built by the relatively small city (250,000 people) of Glendale, which put something like $300 million of taxpayer money into the stadium and has provided operating subsidies to the team the last several years that probably total another $100 million, at least. The city has a bad hand, but keeps doubling down on its bet to try to retain the team.

The problem, of course, is the $100 million difference in the bid-ask for the team. Glendale first tried to fix this by agreeing in a previous deal couple of years ago to basically give the buyer $100 million of taxpayer money to bridge the bid-ask gap. The Goldwater Institute sued, saying that the Arizona Constitution pretty clearly states the government can't directly subsidize commercial interests. They prevailed (before it ever reached court) and the deal died.

The only way left for Glendale to make the deal happen was to give a buyer $100 million in taxpayer money but to do so in a more disguised manner. The one option they had was in the stadium management contract. If they agreed, say, to pay the buyer $10 million a year over market rates for the stadium management contract, over 15 years that has about a $100 million present value. They can get away with this because there is no objective valuation of what a management contract would cost on the open market.

But their ability to do this is, thankfully, about to die. Under intense pressure, and in a fit of good government that I am sure Glendale regrets, it actually went out and sought arms-length contracts for stadium management from third parties. It is enormously unlikely the city will accept any of these bids, because it needs the stadium contract as a carrot for someone to buy the Coyotes at the NHL's inflated price. Besides, I bid on large contracts a lot and I have often been presented with bid packages from an entity that had no intention of awarding, but wanted me to go through all the bid effort just to establish an internal price benchmark or to keep their preferred provider honest. I can smell these from a mile away now.

The problem Glendale will have, though, is that when these 3rd party bids become public (which they inevitably will), it will then be impossible to hide the implicit subsidy in the management contract. Presumably, taxpayers then will push back on any future deals using this dodge, though Glendale citizens seem pretty supine so one never knows. Also, the city can also tweak the responsibilities of the stadium contract, thereby allowing them to claim that comparisons against these past bids are apples and oranges (though this will be hard as I expect arms-length bids around $5 million a year vs. $15 million they propose to pay the team buyer).

PS- It is hilarious to see worried comments from Gary Bettman (NHL Commissioner) about how hard on Glendale it will be if the Coyotes leave town. Merely lowering his asking price to something less than 2x the market price would solve the problem in an instant.

4 Comments

guest:

All the leagues have an implicit policy of punishing cities that don't build for them. Someone was willing to buy the Sacramento Kings to move them to Seattle for more than they got for staying. The NBA intervened, since Seattle had refused to fund a stadium before, and the most important issue for the leagues is to reward continual payoffs, rather than go for the most money right now.

pegr:

"Besides, I bid on large contracts a lot and I have often been presented with bid packages from an entity that had no intention of awarding, but wanted me to go through all the bid effort just to establish an internal price benchmark or to keep their preferred provider honest. I can smell these from a mile away now."